National financing strategy much needed for bond market

The absence of a national strategy for long-term financing hinders the growth of the country's bond market, said the chief of Prime Bank Investment.

Limits should be set for fund collection from different sources, cutting dependency on bank loans. That will, in turn, create an environment conducive to business financing through bonds.

In the monetary policy announced twice a year, the central bank fixes the target of credit growth for the public and private sectors. But the targets are set based on bank loans only, said Syed M Omar Tayub, managing director and chief executive officer of Prime Bank Investment, in a recent interview with the FE.

Bonds do not get much attention, he added.

"The country's bond market still is at its nascent stage mainly because of a structural gap in the national policy for long-term financing."

The securities regulator, the Bangladesh Bank and the revenue board should sit together to formulate a national strategy for a balanced long-term financing through bank loans, bonds and equity-based securities, he said.

Long-term funding through bank loans against short-term deposits poses challenges to banks' debt management. The economy has been bearing the fallout.

"In this situation, a threshold of funds through bonds should be determined in the monetary policy by the central bank," Mr Tayub said.

Moreover, it should be made mandatory for private companies to raise a certain portion of borrowed funds by issuing bonds.

Referring to the insignificant bond market to GDP (gross domestic product) ratio, the CEO of Prime Bank Investment said the Ministry of Finance should push through a strategy for long-term financing.

Then, it would be easy for the regulatory bodies, including the central bank, to follow that through in supporting the corporate bond market.

Bonds issued by the private sector are worth only 0.19 per cent of the country's GDP (gross domestic product), while in India it is 25 per cent of GDP.

The corporate bond market's share of the GDP will go up if companies from the private sector issue more bonds instead of taking out industrial term loans, Mr Tayub said.

"That's why a legal framework is a must for long-term financing from different sources," he added.

Why are incentives important for corporate bonds?

The chief of Prime Bank Investment said it takes around one year for a company to raise funds through corporate bonds. On the other hand, bank loans are disbursed in less than four months after a request is made.

Therefore, companies prefer bank loans to bonds.

Moreover, no incentive is offered to corporate entities for raising funds through bonds.

"Why will companies then be interested in issuing bonds?" asked Mr. Tayub.

Presently, there is no tax incentive for the issuers of bonds.

Investors of corporate bonds, except for zero coupon bonds, do not get any tax incentives while tax obligations are waived against investments in some government securities.

Bond holders, other than banks, financial institutions, and insurers, enjoy a tax exemption against holdings of zero coupon bonds.

Mr Tayub said investors should be offered tax incentives against holdings of corporate bonds too for the risks involved.

Lack of awareness

Both investors and market operators lack knowledge about debt securities, a barrier to making the instrument popular.

"Investors run after risky equities even if less risky or risk-free investment tools are available," Mr Tayub said.

On the other hand, risk-free Treasury bonds give better returns than deposit rates offered by most banks.

"But a majority of the clients are not even aware that Treasury bonds are available at the branches of different banks where they open accounts," said Mr. Tayub.

Many bank officials are also not aware of available fixed income securities and so they do not encourage clients to purchase them.

The coupon rates of some corporate bonds are also higher than deposit rates. For example, the Bangladesh Securities and Exchange Commission (BSEC) in February approved two proposals by Paramount Textile and RANCON Motor Bikes of zero coupon bonds. Both the companies offered interest rates up to 12 per cent.

[email protected]